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Global Agriculture
The Smart Profits Report: Issue #428
Monday, June 11, 2007
Global Agriculture: Key Factors That Could Spark An Agri-Business Investing Boom
By Mark Whistler
Small-Caps Specialist, Mt. Vernon Research
Time to talk turkey… literally.
In America, most of us are pretty spoiled when it comes to our bellies. We live in a wealthy country where we don’t have to worry about having enough food. In addition to the regular supermarkets and farmer’s markets, we also have specialty stores that offer a plethora of organic and natural foods.
Nothing to be concerned about, right? Not exactly.
While we sit and munch away on our nachos and fruit, there are some global agriculture developments taking place that are posing an increasingly serious risk to our food production.
But as we’ve talked about in previous messages with regard to water and uranium, if there’s one thing a supply-demand crunch brings, it’s profitable investment opportunities. Let’s take a look at the situation…
A Small Number With Big Consequences
On Thursday, political leaders from the world’s most powerful "G8" countries agreed on a deal that pledges "substantial" cuts in greenhouse gas emissions in an effort to arrest the negative effects of climate change. Specifically, it targeted a 50% cut by 2050.
This is just as well, because over the past century, the world’s temperature has risen by 0.74 degrees, according to the United Nations.
While that doesn’t sound like a big deal, it’s enough to trigger some pretty serious events…
- For example, Greenland’s massive ice cap, covering 624,000 cubic miles and accounting for one-tenth of the world’s fresh water supplies, is melting much faster than expected. Not surprising, considering that winter temperatures on the cap have risen by 9 degrees Fahrenheit over the past 15 years. Over the past 30 years, the cap’s "melt zone" has swelled by 30%. That’s significant, because the more it melts, the faster the ice sheet slides towards the ocean. Considering that Greenland has enough ice to raise sea levels by 23 feet, if it melted completely, major cities like New York and London would flood.
- According to the United Nations’ "Global Outlook for Ice and Snow" report, if world sea levels were to rise just 3ft, 3in, it could cost $950 billion in damage and expose 145 million people to floods.
- Right now, however, higher temperatures are causing some crippling droughts in many parts of the world and have lowered crop yields for farmers. In fact, global agriculture of wheat production has slumped to a 25-year low, due in part to climate changes.
So how is the world going to get fed?
Never Mind Feeding The 5,000… How About Feeding 1.3 Billion?
With 1.3 billion mouths to feed, it’s no surprise that China needs its agricultural output to perform at high capacity. But according to the United States Department of Agriculture’s (USDA) recent "Commodity Intelligence Report," the 2006-2007 winter was the second-warmest on record. And now, "the warm temperatures and seasonal dryness has resulted in light to moderate drought in many areas of the country." Droughts are about as friendly as Darth Vader when it comes to producing massive crop yields.
Switching to Europe, the USDA report also stated, "Widespread spring dryness developed over much of Europe, stressing crops." Overall, wheat production in Europe this year is expected to be 2.1 million tons below the 5-year average.
But here’s where the story takes a twist…
According to the United States Census Bureau, there are just over six billion people on the planet right now. And in continents like Africa, there are already millions of people starving. But by 2020, there will be three billion more people in the world. That means we’re essentially going to have to figure out how to boost global agriculture production by 50% over the next 13 years, just to meet the population growth of the world.
That’s a major red flag… but a major red alert for investors, too. You see, what we’re talking about here is a "perfect storm" for higher global agriculture prices.
Let’s dig a bit deeper into the story and take a look at the profit-triggering trends…
Hedging The Harvest: The Global Agriculture Equation
With climate changes contributing to food shortages, it’s only logical that global agriculture prices are going to rise as a result. That could begin to change the approach that many agriculture companies take to commodity hedging. And it’s something that could potentially increase net income at the same time.
For example, let’s take a look at Bunge (NYSE: BG), a worldwide leader in "agri-business" in over 32 countries. The company produces fertilizer, animal feed, oilseeds and grains, consumer food products, and milled wheat and corn for commercial food processors.
As you can see from the company’s 46% year-over-year surge in first-quarter sales, lower supply and higher prices is already beginning to have an impact. Okay, now for the bad news: The company took a massive hit, too. Net income slumped 76% during the quarter.
How is this possible, given the rosy picture I just painted? It’s because the loss actually had little to do with the company’s global agriculture output; it mostly occurred because of pretty ugly unrealized market-to-market losses on hedged commodity inventories in South America.
This basically means that the futures prices of agricultural commodities increased by more than current prices. In other words, farmers sold the actual crops for less than where the futures were trading, because Wall Street has priced in an expected future demand spike for commodities like corn-based ethanol. This turned Bunge’s commodity-hedging strategy into a disaster.
But farmers in South America who actually sell crops don’t operate on the same level as Wall Street, and probably don’t care anyway. We’re talking about farmers who just want to sell their crops, not become futures traders or industry analysts.
And because of this disconnect, Bunge got burned - and it provides a valuable lesson in commodity hedging versus simply trading on the real "cash price" of crops…
Fields Of Gold
When the gold market turned particularly unpredictable a few years ago, many gold companies decided to hedge their production in an attempt to protect themselves against volatile prices.
Over the past few years, though, we’ve seen a shift in the opposite direction, as more producers have begun moving away from hedging. Their reasoning is that futures prices can often be even more erratic than the actual spot price of gold itself.
The same theory applies in the global agriculture sector. And given Bunge’s recent hedging horror show and consequent earnings massacre, agri-businesses might start following the example of gold producers, and hedging less in the coming years.
And, if global agricultural prices do continue to climb, a move away from commodity hedging by agri-businesses could actually bolster bottom lines.
And speaking of the bottom line… as the global population grows, it will result in higher global agricultural demand and higher prices. This, coupled with a possible move away from commodity hedging, could create strong momentum for many agri-business stocks - and investors could reap the rewards in their portfolios.
Good investing,
Mark Whistler
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Today’s Smart Profits Action Center
- Feeding off the white-hot ethanol industry, the corn market is a perfect example of what can happen to agriculture prices when a trend takes hold. In September 2006, the price per bushel was $2.70. By the end of February, however, it had soared to around $4.60. But as farmers have planted more corn to take advantage, the result is a drop in price to $3.82 today - and some analysts fear the corn glut has sparked shortages in wheat and soybeans.
- The latest figures from the Food and Agriculture Organization show that global expenditures on imported food will race past $400 billion this year - 5% higher than in 2006. Poorer developing nations face a 9% hike, putting them under increased strain. Driving the gain is an increase in grain imports. And because international freight rates have risen to new highs recently, the import value of commodities is climbing even higher. The bill for grains and vegetable oils is forecast to rise 13% this year from 2006.
- With the global population rising, the earth getting warmer and droughts crippling many parts of the world, farmers are finding it increasingly difficult to produce enough food. This could be the next big commodity supply-demand crunch - and the Xcelerated Profits Report team is already on the commodities story. The editors have already handed readers gains of 20% and 16% (with 32% downside protection) in water and uranium - two other commodities facing severe supply-demand issues. For more details on how you can profit from the most lucrative economic trends, please follow this link.
Related Articles:
- Corn Commodity: Cashing In With Sales Up 170% On The Government’s Best-Laid Ethanol Plan
- The Water Industry: Water Wars Begin On The World’s Most Precious Resource
- Commodities: How to Create Your Own "Mini Hedge Fund"
